Oil may relapse to $40 due to weak recovery, uncertainties – Analysts

*Offshore rig.

*Offshore rig.

Oscarline Onwuemenyi, 
with agency reports

16 July 2016, Sweetcrude, Abuja – As oil’s upward climb runs out of momentum, more and more analysts expect the market’s next move will be back down toward $40 a barrel.

Brent crude prices almost doubled between January and June, signaling that markets were finally healing as falling U.S. output, rising demand and disruptions from Nigeria to Canada all helped eliminate a global production surplus.

Now, as consumption falters and halted supplies return, analysts from BNP Paribas SA to JBC Energy GmbH warn prices may sink once more.

While there’s still a consensus that the worst of the oil glut that sent prices to a 12-year low is over, the International Energy Agency cautioned this week that “the road ahead is far from smooth.” Inventories are brimming after two years of surplus production and U.S. demand for gasoline — the key driver of prices in summer — is proving to be disappointing.

As unwanted barrels pile up, traders have been forced to hoard the most volume of crude at sea on tankers since 2009, according to the Paris-based agency.

“For the time being, the path of least resistance for oil prices is lower,” Mike Wittner, head of oil-market research at Societe Generale SA in New York, said by phone. “Even though we’ve made this shift from an oversupplied to a balanced market, our short-term caution comes from inventories still being high and crude coming back from disruptions.”

The supply disruptions that helped lift crude above $50 in recent months are fading. Oil-sands producers in Canada have restored most of the output halted when wildfires menaced facilities in May and curbed more than 1 million barrels a day, or about 40 percent of supplies. OPEC member Nigeria revived some output in June after militant attacks cut production to a three-decade low, the IEA said.

There’s a chance Libya could increase exports this month after the two rival branches of the state-run oil company agreed to start working together again, although previous efforts to unify the divided country have failed.

Brent crude, the international benchmark, fell 0.6 percent to $47.11 a barrel at 11:47 a.m. on the London-based ICE Futures Europe exchange. In a signal that demand could be weakening, the one-year price contango — the discount on September futures compared with contracts for a year later — was $5.22 Friday, double the level a month ago.

“Unplanned supply-side factors brought the market near balance in the second quarter, and it is again supply-side factors that will hinder that balance in the near term,” Harry Tchilinguirian, head of commodities research at BNP Paribas SA in London, said by e-mail. “We are looking to return to $40 or below” for the U.S. benchmark, West Texas Intermediate.

It’s not only the production of crude oil that has analysts concerned. There is an “epic overhang” of gasoline after refiners built up stockpiles of the fuel at the beginning of the year when crude was cheap, said Amrita Sen, chief oil analyst at London-based consultants Energy Aspects Ltd. Still, she said a drop to as low as $40 a barrel is unlikely unless there’s significant selling by speculative investors.

Threats to demand are especially strong as concern over the U.K.’s exit from the European Union clouds the economic outlook, Giovanni Staunovo, an analyst at UBS Group AG in Zurich, said by e-mail.

“When the macro dust settles, which might take a while, it will become apparent that oil fundamentals are weaker than many realized,” said Julius Walker, senior consultant at JBC Energy in Vienna.

The “main narrative” of a globally balanced market remains intact, said Societe Generale’s Wittner. That means buyers would return before crude revisited the lows of earlier this year. WTI crude fell to $26.05 a barrel in February, the lowest level since May 2003.

“I’m not uber-bearish,” Wittner said. “I think there’s a point where you see some bargain-hunting coming, and that point is $40 a barrel.”

About the Author